SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 5, 1994
Commission file number 1-10204
------------------------------
CPI CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1256674
(State of Incorporation) (I.R.S. Employer
Identification No.)
1706 Washington Avenue
St. Louis, Missouri 63103-1790
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 231-1575
-------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------------------ -----------------------
Common Stock $.40 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes _____ No __X__.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes __X__ No _____.
Aggregate market value of the Registrant's voting stock held by
non-affiliates, based upon the closing price of said stock on the
New York Stock Exchange - Composite Transaction Listing on
May 2, 1994 ($14.625 per share): $203,705,775.
As of May 2, 1994, 14,443,702 shares of the Common Stock,
$0.40 par value, of the Registrant were outstanding.
Documents Incorporated by Reference:
Portions of the Annual Report to Shareholders for the year ended
February 5, 1994, are incorporated by reference into Parts I and II
of this Report.
Portions of the Proxy Statement relating to the Annual Meeting
of Shareholders to be held June 7, 1994, are incorporated by
reference into Part III of this Report.
PAGE 1 OF 29
PAGES 4-10 OF THIS DOCUMENT CONTAIN THE EXHIBIT INDEX
<PAGE>
<TABLE>
TABLE OF CONTENTS
<CAPTION>
10K 10K/A
Page Page
---- -----
<S> <C> <C>
Part I
- ------
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of
Security Holders 8
Part II
- -------
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9 13-23
Item 8. Financial Statements and Supplementary Data 9 24-25
Item 9. Disagreements on Accounting and
Financial Disclosure 9
Part III
- --------
Item 10. Directors and Executive Officers of
the Registrant 10
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial
Owners and Management 12
Item 13. Certain Relationships and Related
Transactions 12
Part IV
- -------
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 13 4
Signatures 21 11
</TABLE>
2
<PAGE>
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information required under this Item is contained in the
Registrant's 1993 Annual Report to Shareholders, pages 135 through
144 of the original 10-K, pages 13-23 of this document, and
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required under this Item is contained in the
Registrant's 1993 Annual Report to Shareholders, pages 145 through
177 of the original 10-K, pages 24-25 of this document, and
incorporated herein by reference.
3
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Index to Certain Documents
<TABLE>
Index to Certain Documents
<CAPTION>
Original
10K 10K/A
Page No. Page No.
---------- --------
Annual
Report To
Share-
holders*
---------- --------
<S> <C> <C>
(1) Independent Auditor's Report 178**
(2) Financial Statements:
(a) Consolidated Balance Sheets 145-146
as of February 5, 1994 and
February 6, 1993
(b) Consolidated Statements of 147
Earnings for the fiscal years
ended February 5, 1994,
February 6, 1993 and
February 1, 1992
(c) Consolidated Statements of 148-150
Changes in Stockholder's Equity
for the fiscal years ended
February 5, 1994,
February 6, 1993 and
February 1, 1992
(d) Consolidated Statements of 151-152 24-25
Cash Flows for the fiscal
years ended February 5, 1994,
February 6, 1993 and
February 1, 1992
(3) Notes to Consolidated Financial
Statements 153-173 26-28
<FN>
* Which pages are incorporated herein by reference.
** Also on Page 20 of original Form 10-K.
</TABLE>
4
<PAGE>
<TABLE>
Index to Certain Documents
<CAPTION>
Page Number
Form 10-K
-----------
<S> <C>
(4) Financial Statement Schedules ***
I. Consolidated Short-Term
Investments 22-28
V. Consolidated Property and
Equipment 29-30
VI. Consolidated Accumulated
Depreciation of Property
and Equipment 31-32
VIII. Consolidated Allowance for
Uncollectible Receivables 33
X. Supplementary Consolidated
Earnings Statement
Information 34
<FN>
*** All other schedules and notes under Regulation S-X are
omitted because they are either not applicable, not
required, or the information called for therein appears in
the consolidated financial statements of notes thereto.
</TABLE>
(b) Reports on Form 8-K
On December 23, 1993, the Company filed a Report on Form 8-K
with an attached press release announcing: a third quarter
decrease in earnings per share; a third quarter increase in
sales mainly due to acquisitions; expected fourth quarter
results below last year's and a $50 million investment in new
portrait studio technology and renovation.
5
<PAGE>
(c) Index to Exhibits
<TABLE>
Index to Exhibits
<CAPTION>
Page Number
Form 10-K
-----------
<S> <C>
3) Articles of Incorporation and Bylaws.
-------------------------------------
(a) Articles of Incorporation
Incorporated by reference to Exhibit 3
to the Company's Annual Report on
Form 10-K, dated April 27, 1990
(Commission File No. 1-10204)
(b) Bylaws
Incorporated by reference to Exhibit 3
to the Company's Annual Report on
Form 10-K, dated April 27, 1990
(Commission File No. 1-10204)
Amendment to Bylaws dated 35
February 3, 1994
4) Instruments Defining the Rights of
----------------------------------
Security Holders, Including Debentures.
---------------------------------------
(a) Articles of Incorporation and Bylaws.
Incorporated by reference to
Exhibit 3 to the Company's Annual
Report on Form 10-K, dated
April 27, 1990
(Commission File No. 1-10204)
(b) Note Agreement for Series A
Senior Notes Due August 31, 2000
($33,000,000) and Series B
Senior Notes due August 31, 2000
($27,000,000). Incorporated by
reference to Exhibit 4 to Form 10-Q,
filed September 3, 1993.
(Commission File No. 1-10204)
</TABLE>
6
<PAGE>
<TABLE>
Index to Exhibits
<CAPTION>
Page Number
Form 10-K
-----------
<S> <C>
(c) Pledge Agreement. Incorporated by
reference to Exhibit 4 to Form 10-Q,
filed September 3, 1993.
(Commission File No. 1-10204)
(d) Collateral Agency and Intercreditor
Agreement. Incorporated by reference
to Exhibit 4 to Form 10-Q, filed
September 3, 1993.
(Commission File No. 1-10204)
(e) Series A Senior Note Due
August 31, 2000. No. R-A1 $33,000,000.
Incorporated by reference to Exhibit 4
to Form 10-Q, filed September 3, 1993.
(Commission File No. 1-10204)
(f) Series B Senior Note Due
August 31, 2000. No. R-B1 $22,500,000.
Incorporated by reference to Exhibit 4
to Form 10-Q, filed September 3, 1993.
(Commission File No. 1-10204)
(g) Series B Senior Note Due
August 31, 2000. No. R-B2 $4,500,000.
Incorporated by reference to Exhibit 4
to Form 10-Q, filed September 3, 1993.
(Commission File No. 1-10204)
(h) Revolving Credit Agreement. Incorporated
by reference to Exhibit 4 to Form 10-Q,
filed September 3, 1993.
(Commission File No. 1-10204)
(i) Revolving Credit Note. Incorporated
by reference to Exhibit 4 to Form 10-Q,
filed September 3, 1993.
(Commission File No. 1-10204)
</TABLE>
7
<PAGE>
<TABLE>
Index to Exhibits
<CAPTION>
Page Number
Form 10-K
-----------
<S> <C>
(j) First Amendment to Rights Agreement.
Incorporated by reference to Exhibit 4
to Form 10-Q, filed September 3, 1993.
(Commission File No. 1-10204)
(k) CPI Corp. Shareholder Rights Plan.
Incorporated by reference to
Exhibit 8 to Form 8-A, filed
May 2, 1989.
(l) Amendment to CPI Corp. Shareholder 36-37
Rights Plan
10) Material Contracts
------------------
(a) Contract With Sears, Roebuck and Co. 38-87
</TABLE>
8
<PAGE>
<TABLE>
Index to Exhibits
<CAPTION>
Additional information required by this Item 10 is
incorporated by reference to the below listed documents with
corresponding filing date and registration or Commission file
numbers where applicable.
Registration/
Information Incorporated Document Filing Commission
by Reference Referred to Date File Numbers
- --------------------------- ------------- -------- ------------
<S> <C> <C> <C>
(b) Employment Agreements- Annual Report 5/5/93 1-10204
A. Essman, R. Isaak, on Form 10-K
D. April, P. Morris, dated 4/30/93
B. Arthur
(c) CPI Corp. 1981 Stock Annual Report 5/5/93 1-10204
Bonus Plan (As Amended on Form 10-K,
and Restated on 2/3/91) dated 4/30/93
(d) Deferred Compensation Annual Report 5/1/92 1-10204
and Stock Appreciation on Form 10-K,
Rights dated 4/24/92
(e) Employment Termination Annual Report 5/1/92 1-10204
Agreement - S. Coovert on Form 10-K,
dated 4/24/92
(f) CPI Corp. Restricted Annual Report 5/1/92 1-10204
Stock Plan on Form 10-K,
dated 4/24/92
(g) Deferred Compensation Annual Report 5/1/92 1-10204
and Retirement Plan on Form 10-K,
for Non-Management dated 4/24/92
Directors
(h) Stock Purchase Form 8-K 3/25/91 -
Agreement - M. Bohm
(i) CPI Corp. Stock Option Form S-8 7/28/92 33-50082
Plan (As Amended and
Restated
effective 2/2/92)
(j) Registration of Form 8-A 3/21/89 -
Securities on the New
York Stock Exchange
(k) CPI Corp. Shareholder Exhibit to 5/2/89 -
Rights Plan Form 8-A
(l) CPI Voluntary Stock Form D 3/31/93 -
Option Plan
</TABLE>
9
<PAGE>
<TABLE>
Index to Exhibits
<CAPTION>
Page Number
Form 10-K
-----------
<S> <C>
11) Computation of Earnings
Per Common Share 88
13) 1992 Annual Report to Shareholders 89-181
21) Subsidiaries of the Registrant 182-183
23) Accountants' Consent 184
27) Financial Data Schedule
</TABLE>
10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CPI CORP.
DATE: January 19, 1995 BY: /s/ BARRY ARTHUR
--------------------
Barry Arthur
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
11
<PAGE>
INDEX-FINANCIAL REVIEW
<TABLE>
Index-Financial Review
<CAPTION>
Original Amended
10-K 10-K/A
Page(s) Page(s)
<S> <C> <C>
Financial Background and Trends 123-134
Management's Discussion and Analysis of
Financial Condition and Results
of Operations 135-144 13-23
Consolidated Balance Sheets 145-146
Consolidated Statements of Earnings 147
Consolidated Statement of Changes
in Stockholders' Equity 148-150
Consolidated Statements of Cash Flows 151-152 24-25
Notes to Consolidated Financial Statements 153-173
Selected Quarterly Financial Data and
Stock Price and Volume 174
Independent Auditors' Report 178
Company Directors and Officers 179
Investor Information 180
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's three business segments are Portrait Studios,
Photofinishing and Other Products and Services. The Other Products
and Services segment consists of the newly acquired wall decor
operation and the electronic publishing operation. To establish a
framework for discussion, financial data has been selected which
summarizes the Company's operating results for fiscal years 1993,
1992 and 1991. The 1992 fiscal year ended February 6, 1993
included a 53 week period, whereas fiscal years 1993 and 1991,
ended February 5, 1994 and February 1, 1992, respectively, covered
52 week periods.
13
<PAGE>
<TABLE>
Selected Financial Data 1993 Versus 1992
(In thousands except per share amounts)
<CAPTION>
FY '93 Amount Percent FY '92
52 weeks Change Change 53 weeks
<S> <C> <C> <C> <C>
Net sales:
Portrait Studios $237,937 $(26,421) (10.0)% $264,358
Photofinishing 187,210 18,014 10.6 169,196
Other Products
and Services 50,373 34,547 218.3 15,826
--------- --------- ------- ---------
Total net sales $475,520 $ 26,140 5.8% $449,380
========= ========= ======= =========
Operating earnings:
Portrait Studios $ 29,970 $(18,471) (38.1)% $ 48,441
Photofinishing 6,972 (2,637) (27.4) 9,609
Other Products
and Services 1,142 5,275 127.6 (4,133)
--------- --------- ------- ---------
Total operating earnings 38,084 (15,833) (29.4) 53,917
General corporate
expenses 19,299 217 1.1 19,082
--------- --------- ------- ---------
Income from operations 18,785 (16,050) (46.1) 34,835
Net interest income
(expense) (789) (1,803) (177.9) 1,014
Other income 524 (150) (22.2) 674
--------- --------- ------- ---------
Earnings before income
taxes and cumulative
effect of accounting
change 18,520 (18,003) (49.3) 36,523
Income tax expense 7,404 (6,504) (46.8) 13,908
--------- --------- ------- ---------
Earnings before
cumulative effect of
accounting change $ 11,116 $(11,499) (50.8)% $ 22,615
Cumulative effect of
accounting change 2,120 2,120 100.0 -
--------- --------- ------- ---------
Net earnings $ 13,236 $ (9,379) (41.5)% $ 22,615
========= ========= ======= =========
Earnings per common
share:
Earnings before
cumulative effect of
accounting change $ 0.76 $ (0.78) (50.6)% $ 1.54
Cumulative effect of
accounting change 0.14 0.14 100.0 -
--------- --------- ------- ---------
Net earnings $ 0.90 $ (0.64) (41.6)% $ 1.54
========= ========= ======= =========
Weighted average number
of common and common
equivalent shares
outstanding 14,666 (10) (0.1)% 14,676
========= ========= ======= =========
Dividends per share $ 0.56 $ - - $ 0.56
========= ========= ======= =========
</TABLE>
14
<PAGE>
<TABLE>
Selected Financial Data 1992 Versus 1991
(In thousands except per share amounts)
<CAPTION>
FY '92 Amount Percent FY '91
53 weeks Change Change 52 weeks
<S> <C> <C> <C> <C>
Net sales:
Portrait Studios $264,358 $(14,647) (5.2)% $279,005
Photofinishing 169,196 47,818 39.4 121,378
Other Products
and Services 15,826 1,690 12.0 14,136
--------- --------- ------- ---------
Total net sales $449,380 $ 34,861 8.4% $414,519
========= ========= ======= =========
Operating earnings:
Portrait Studios $ 48,441 $ (8,502) (14.9)% $ 56,943
Photofinishing 9,609 1,942 25.3 7,667
Other Products
and Services (4,133) 615 13.0 (4,748)
--------- --------- ------- ---------
Total operating earnings 53,917 (5,945) (9.9) 59,862
General corporate
expenses 19,082 (1,608) (7.8) 20,690
--------- --------- ------- ---------
Income from operations 34,835 (4,337) (11.1) 39,172
Net interest income
(expense) 1,014 (2,409) (70.4) 3,423
Other income 674 (6) (0.9) 680
--------- --------- ------- ---------
Earnings before income
taxes and cumulative
effect of accounting
change 36,523 (6,752) (15.6) 43,275
Income tax expense 13,908 (2,232) (13.8) 16,140
--------- --------- ------- ---------
Earnings before
cumulative effect of
accounting change $ 22,615 $ (4,520) (16.7)% $ 27,135
Cumulative effect of
accounting change - - - -
--------- --------- ------- ---------
Net earnings $ 22,615 $ (4,520) (16.7)% $ 27,135
========= ========= ======= =========
Earnings per common
share:
Earnings before
cumulative effect of
accounting change $ 1.54 $ (0.26) (14.4)% $ 1.80
Cumulative effect of
accounting change - - - -
--------- --------- ------- ---------
Net earnings $ 1.54 $ (0.26) (14.4)% $ 1.80
========= ========= ======= =========
Weighted average number
of common and common
equivalent shares
outstanding 14,676 (431) (2.9)% 15,107
========= ========= ======= =========
Dividends per share $ 0.56 $ - - $ 0.56
========= ========= ======= =========
</TABLE>
15
<PAGE>
Significant events that affected operating results in the last two
fiscal years are described as follows:
Prints Plus Acquisition
On May 30, 1993, the Company acquired Prints Plus, a wall decor
chain, from Melville Corporation for approximately $14.7 million.
The acquisition included 102 stores, located in malls throughout
the United States, operating a prints, posters and framing business
with annual sales in excess of $40.0 million. In addition, the
Company entered into a non-compete agreement with Melville
Corporation for cash consideration aggregating approximately $1.0
million. The acquisition was recorded using the purchase method of
accounting and, accordingly, the results of operations have been
included in the Company's consolidated financial statements
effective May 30, 1993.
Proex Acquisition
On December 1, 1992, the Company purchased the operational assets
of Pemtom, Inc., a Minneapolis-based company operating under the
name Proex, for cash consideration amounting to approximately $19.0
million. The fair value in excess of the net assets acquired was
approximately $6.7 million, which is being amortized on a
straight-line basis over a forty-year period. Under separate
agreements, the company secured the services of the seven-member
Pemtom management team for an aggregate amount of $4.8 million. The
acquired company now operates 19 portrait studios and 28
photo-finishing locations, which together had annual sales of $22.3
million in fiscal year 1993. The acquisition was recorded as a
purchase and, accordingly, the results of operations have been
included in the Company's consolidated financial statements
effective December 1, 1992.
Results of Operations
Revenues
Sales were $475.5 million in fiscal 1993, a 5.8% increase over
1992. The increase is mainly due to the added sales from the newly
acquired Prints Plus and Proex operations, partially offset by one
less week of sales in 1993 and by a decline in Portrait Studio
sales caused by lower comparable sales in the Sears Portrait
Studios operation and the absence of sales from the Wal-Mart
traveling studio business and Portraits of Distinction Studios.
Sales in 1992 increased 8.4% to $449.4 million from $414.5 million
in 1991. Photofinishing expansion, including the acquisition of Fox
Photo and Proex, accounted for a major portion of the sales
increase. During fiscal year 1992, the Company withdrew from the
Wal-Mart traveling studio business and the Portraits of Distinction
studios. Combined sales from these businesses amounted to $7.3
million and $26.8 million in fiscal years 1992 and 1991,
respectively.
16
<PAGE>
Sears Portrait Studios sales were $237.3 million, $255.9 million
and $251.0 million for fiscal years 1993, 1992 and 1991,
respectively, declining 7.3% in 1993 after increasing 2.0% in 1992.
Eliminating the effect of the 53-week year in 1992, Sears Portrait
Studio sales, on a comparable 52-week basis, declined 5.9% in 1993
after being virtually level in 1992 with the prior year. In the
last three fiscal years, the Company has experienced increasing
competition from others who have continued to add permanent studio
locations. In an effort to maintain market share, the Company has
used price promotions more aggressively during the last two fiscal
years, resulting in lower customer averages. Additionally, the
Company closed 42 portrait studios during the year, the majority as
a result of Sears planned store closing program announced early in
1993. During the 1993 fiscal year, the Company opened 33 portrait
studios, 29 of which are not in Sears stores.
Photofinishing sales in 1993 rose 10.6% to $187.2 million from
$169.2 million in 1992, following a 39.4% gain from $121.4 million
in 1991. Photofinishing includes the sales and operating results of
CPI Photo Finish, Fox Photo from August 18, 1991 and Proex from
December 1, 1992, the effective dates of these acquisitions. These
acquisitions during this two-year period accounted for most of the
sales increases. Stores in operation experienced a net increase of
12 and 19 locations in 1993 and 1992, respectively, bringing the
total locations in operation to 670, 658 and 639 at the end of
1993, 1992 and 1991, respectively.
Other Products and Services includes the electronic publishing
business operating under two trade names, Copy Mat and Copy USA,
and the newly acquired wall decor business operating under the
names Prints Plus and Prints and Posters. Sales increased more than
200% in 1993 to $50.4 million from $15.8 million due to the
acquired wall decor operation in 1993. Sales increased 12.0% in
1992 due to the maturing of the electronic publishing locations
opened in the last three years.
Operating Income
Segment operating earnings for prior years have been restated to
conform with the current year's presentation. Certain employee
benefit costs, which in prior years were recorded as part of
corporate expense, have now been reclassified to the operating
segments to better reflect the operating contribution of the
segments. Income from operations declined 46.1% in 1993 to $18.8
million from $34.8 million in 1992 primarily due to a 38.1%
reduction in Portrait Studio operating earnings. Additionally,
Photofinishing experienced a 27.4% decline in operating earnings,
primarily due to lower gross profit margins. Other Products and
Services operating earnings increased substantially, primarily due
to the contribution to operating earnings from the acquired wall
decor operation. In 1992, income from operations declined 11.1%
resulting from a decline in Sears Portrait Studio operating income,
17
<PAGE>
which was partially offset by higher Photofinishing operating
income and reduced losses in the electronic publishing business.
Corporate expense increased in fiscal 1993 due to a $1.4 million
expense for severance and early retirement benefits under a
voluntary early retirement program, which were offset by the
Company's previously announced cost cutting program. These cost
reduction efforts included a reduction in employment costs through
elimination of field management positions and corporate
administrative and support staff positions and a revision of the
portrait studio employment allocation formula to reduce in-store
employment costs. Other cost reduction efforts included
negotiation of reductions in material and supply costs, closing
certain regional offices in the Company's Photo Finish Division,
reduction in advertising, postponement of new location openings and
reduction in manufacturing costs for a portion of the year through
smaller portrait packages. While the total effect of the cost
reduction efforts is difficult to measure, the Company believes it
achieved in the range of $5 to $6 million in savings. The actual
total is impossible to quantify because some of the planned savings
in employment costs were offset by increased costs in the second
half of the year as the Company staffed portrait studios to serve
a substantial increase in customers.
Sears Portrait Studios operating margins expressed as a percent of
sales were 12.3%, 18.9% and 23.1% for fiscal years 1993, 1992 and
1991, respectively, declining sharply in each of the last two
fiscal years. After a slight sales increase in 1992, a 53-week
year, Sears Portrait Studios experienced a 7.3% sales decline in
1993 or a 5.9% sales decline on a comparable 52-week year basis. In
an effort to maintain market share, the Company has aggressively
priced products. Coupled with increased content in advertised
promotions, this pricing has led to a deterioration of profit
margins. Additionally, operating earnings were penalized by the
extensive testing of products, services and pricing in an effort to
better understand customer needs. The Company should begin to see
the benefit of this testing as new marketing concepts are
introduced and the new freeze-frame digital imaging systems are
installed in the portrait studios. Our testing indicates customers'
response to these changes will have a positive effect both in terms
of customer satisfaction and increased sales.
Photofinishing operating earnings declined 27.4% in 1993 to $7.0
million from $9.6 million in 1992, after increasing 25.3% from $7.7
million in 1991. Operating earnings declined in 1993 primarily due
to lower gross profit margins resulting from an unfavorable sales
mix, as sales of high margin products declined while sales of low
margin products increased. Generally, the sales of value added
products and services, such as photographic prints and processing,
have high margins, whereas sales of film, accessories and ancillary
products carry lower profit margins. Competitive pricing reduced
the sales of value added products and services, reducing profit
18
<PAGE>
margins. Profit margins were further reduced by increased sales and
related costs of low profit margin products. Operating earnings in
1992 increased 25.3% primarily due to the full year inclusion of
Fox Photo.
Other Products and Services improved operating earnings reflect the
inclusion of the newly acquired wall decor business in operating
results. The electronic publishing business also showed improvement
in operating performance as operating losses were reduced in both
1993 and 1992. In the wall decor operation, a majority of the sales
and profits are generated in the fourth quarter surrounding the
holiday season. Accordingly, the operating earnings for the wall
decor operation were disproportionately high due to the partial
year, which did not include the early, seasonally slow period.
Net Earnings
Net earnings declined 41.5% to $13.2 million in 1993 and 16.7% to
$22.6 million in 1992 from $27.1 million in 1991. Included in net
earnings in 1993 is a $2.1 million benefit from the cumulative
effect of a change in accounting principles discussed below under
Income Taxes. Before the benefit, net earnings declined 50.8% to
$11.1 million. The decline in net earnings in each of the last two
fiscal years resulted from lower operating earnings coupled with
interest expense in 1993 and reduced interest income in 1992, and
a higher effective income tax rate in each of the last two fiscal
years. The decline in interest income and the subsequent increase
in interest expense resulted from the Company's recent acquisitions
of Fox Photo, Proex and Prints Plus. Additionally, the Company
entered into a $60.0 million long-term debt agreement in 1993 which
has substantially increased borrowing costs.
Earnings per share before the change in accounting decreased 50.6%
in 1993 to $0.76 from $1.54 in 1992, following a 14.4% decrease
from $1.80 in 1991. After the cumulative effect of the change in
accounting principles, net earnings decreased 41.6% to $0.90 in
1993.
Income Taxes
The effective income tax rate was 40.0% in 1993 compared to 38.1%
in 1992 and 37.3% in 1991. The increase in the 1993 effective
income tax rate resulted primarily from an increase in
nondeductible amortization expense related to the intangible assets
resulting from acquisitions, the Omnibus Budget Reconciliation Act
of 1993 and reduced tax credits from the restoration of the
Company's corporate headquarters. Current year earnings include a
$2.1 million cumulative benefit from a change in accounting
principles. The accounting change, recorded in the first quarter of
1993, resulted from adoption of the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," on a prospective basis. In adopting SFAS No. 109,
the Company has changed its method of accounting for income taxes
from the deferred method to the asset and liability method.
19
<PAGE>
Liquidity and Capital Resources
On August 31, 1993, the Company entered into an agreement with two
insurance companies for the private placement of senior notes in
the amount of $60.0 million (the Note Agreement). The notes, issued
pursuant to the Note Agreement, mature over a seven-year period
with an average maturity of 5.42 years and with the first principal
payment due at the end of the third year. Interest on the notes is
payable semi-annually at an average effective rate of 6.44%. The
Note Agreement requires the Company to maintain certain financial
ratios and to comply with certain restrictive covenants. The
Company incurred approximately $0.5 million in costs related to the
notes, which will be amortized proportionately over the seven-year
term of the notes. Concurrently, the Company negotiated to reduce
its available line of credit with a local bank from $40.0 million
to $25.0 million. A portion of the proceeds from the notes was used
to pay off the outstanding balance of the Company's line of credit.
The remaining proceeds will be used to fund the Company's planned
capital expenditure program in 1994 and for other corporate
purposes.
The capital expenditure program includes the continuation of the
$75 million long-range program involving the application of digital
imaging technology to products and services in the Sears Portrait
Studios. The Company estimates the planned capital expenditures
for installing the new digital freeze-frame imaging system and
studio renovations will aggregate $35 million in fiscal year 1994.
The digital imaging system is expected to be fully installed by the
end of September 1994 in the United States, with the remaining
installation in Canada scheduled for completion in early 1995. The
studio renovation program is expected to begin in early fiscal 1994
and will take about five years to complete. The Company expects to
fund this capital expenditure program through proceeds of maturing
short-term investment balances, borrowing against lines of credit
and utilizing operating cash flow. Portrait Studio depreciation
expense is expected to increase by $4.0 million in fiscal 1994 over
the comparable period of fiscal 1993 as a result of this program.
Additionally, interest expense will increase by $1.6 million in
fiscal year 1994 over fiscal 1993 levels as a result of this
planned capital expenditure program.
Total assets were $305.8 million, $237.8 million and $238.9 million
for 1993, 1992 and 1991, respectively. Cash and cash equivalents
increased in 1993 due to the cash received on the $60.0 million
Senior Notes, after declining in 1992 and 1991 as a result of the
acquisition of Fox Photo and Proex. Cash and cash equivalents
amounted to $34.6 million, $21.0 million and $31.2 million,
representing 11.3%, 8.8% and 13.1% of total assets at the end of
1993, 1992 and 1991, respectively. Working capital increased to
$62.6 million in 1993 from $16.3 million in 1992.
20
<PAGE>
The table below shows assets by line of business. Corporate assets
consist primarily of the Company's headquarters and surrounding
property, cash and marketable securities.
<TABLE>
Identifiable Assets (dollars in thousands)
<CAPTION>
1993 % Total 1992 % Total
<S> <C> <C> <C> <C>
Portrait Studios $ 62,694 20.5% $ 49,353 20.8%
Photofinishing 125,044 40.9 133,156 56.0
Other Products and Services 31,491 10.3 12,607 5.3
Corporate:
Cash and cash equivalents 34,579 11.3 20,978 8.8
Short-term investments 31,777 10.4 --- ---
Other 20,211 6.6 21,657 9.1
-------- ------ -------- ------
Total $305,796 100.0% $237,751 100.0%
======== ====== ======== ======
</TABLE>
Stockholders' equity increased 2.1% and 7.3% to $175.5 million and
$171.9 million at the end of 1993 and 1992, respectively, net of
treasury stock repurchases of $0.7 million and $2.3 million in 1993
and 1992, respectively. The 9.5% increase in stockholders' equity
since 1991 is primarily due to a $17.1 million increase in retained
earnings after consideration of dividends, which was partially
offset by the purchase of treasury stock. On September 28, 1988,
the Company's Board of Directors authorized the Company to purchase
up to 2,500,000 shares of CPI Corp. common stock, or approximately
15% of the then outstanding common stock. On April 2, 1992, the
Company's Board of Directors authorized the purchase of an
additional 2,000,000 shares of CPI Corp. common stock. Under its
stock repurchase program, the Company has acquired 2,363,808 shares
for $58.6 million as of February 5, 1994. In fiscal year 1993, 1992
and 1991, 40,655 shares, 101,210 shares and 480,792 shares were
purchased for $0.7 million, $2.3 million and $11.7 million,
respectively.
21
<PAGE>
The following table sets forth selected financial data regarding
capital resources and liquidity for the Company's last three fiscal
years:
<TABLE>
Selected Financial Data Regarding Capital Resources and
Liquidity for 1993, 1992 and 1991 (in thousands of dollars)
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Net cash flow provided
by operations $ 39,389 $ 36,867 $ 53,902
--------- --------- ---------
Investing activities:
Capital expenditures (30,363) (13,274) (22,271)
Acquisitions (14,732) (23,942) (70,233)
Purchase of short-term investments (45,228) --- ---
Proceeds from maturing short-term
investments 13,452 --- ---
Other (47) 295 274
--------- --------- ---------
Net investing (76,918) (36,921) (92,230)
--------- --------- ---------
Financing activities:
Proceeds from issuance of
common stock 439 599 1,574
Net increase (decrease) in debt 59,547 (275) (139)
Dividends (8,198) (8,206) (8,443)
Treasury stock purchases (657) (2,332) (11,717)
--------- --------- ---------
Net financing 51,131 (10,214) (18,725)
--------- --------- ---------
Increase (decrease) in cash
and cash equivalents $ 13,601 $(10,268) $(57,053)
======== ========= =========
During the period 1991 through 1993, the Company generated $130.2
million in internal funds from operations. Investments during this
period amounted to $174.3 million, including capital expenditures
of $65.9 million and acquisitions amounting to $108.9 million.
Acquisitions consist primarily of the Fox Photo, Proex and Prints
Plus businesses with acquired property and equipment amounting to
$42.1 million and intangible assets resulting from purchase
transactions amounting to $66.8 million. Financing activities
included $59.1 million in additional debt primarily due to the
placement of Senior Notes for $60.0 million, the repurchase of
treasury stock amounting to $14.7 million and dividends paid
amounting to $24.8 million. The net result of these transactions
amounted to a $21.9 million decrease in cash and cash equivalents
during the three-year period.
22
<PAGE>
Future Operations
The Company expects fiscal year 1994 to be one of significant
change, especially for Sears Portrait Studios. After a great deal
of testing, planning and design, the Company has embarked on a
five-year program to provide customers a new level of service at
Sears Portrait Studios. In addition, the Company will benefit from
a renewed relationship with Sears under a new five-year license
agreement. The agreement reflects Sears' and the Company's mutual
commitment to contribute to the implementation of each other's
strategic development plans. In addition, the Company anticipates
cooperative marketing programs with Sears and studio expansion and
renovation to complement Sears' previously announced store
renovation program. The Company also plans to install its new
freeze-frame digital imaging system in most Sears Portrait Studio
locations by the third quarter of 1994. This new system allows both
the photographer and the customer to view images at the time the
photograph is taken. The Company believes these changes will have
a positive effect on earnings in 1994 but not until the second
fiscal half, as the first half will be penalized by the cost of
training and additional depreciation related to the new system.
23
<PAGE>
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS--
FOR FISCAL YEARS ENDED: FEBRUARY 5, 1994, FEBRUARY 6, 1993
AND FEBRUARY 1, 1992
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows provided by
operating activities $ 39,389,209 $ 36,866,797 $ 53,901,903
Cash flows provided by
(used in) financing
activities:
Proceeds from
issuance of
long-term debt 59,913,356 - 305,178
Repayment of
long-term debt (366,418) (275,480) (444,731)
Issuance of common
stock to employee
stock plans 438,461 599,413 1,573,929
Cash dividends (8,198,125) (8,205,860) (8,442,742)
Purchase of treasury
stock (657,178) (2,332,359) (11,716,619)
------------- ------------- -------------
Cash flows provided
by (used in)
financing
activities 51,130,096 (10,214,286) (18,724,985)
------------- ------------- -------------
Cash flows before
investing activities 90,519,305 26,652,511 35,176,918
------------- ------------- -------------
Cash flows provided by
(used in) investing
activities:
Purchases of short-
term investments (45,228,083) --- ---
Maturities of short-
term investments 13,451,459 --- ---
Additions to property
and equipment, net (30,362,715) (13,274,473) (22,271,472)
Acquisitions:
Property and
equipment (13,629,943) (11,056,700) (17,401,095)
Intangible assets (1,101,639) (12,885,268) (52,831,924)
Long-term investments 8,826 340,783 477,456
Restricted stock (56,000) (45,786) (203,061)
------------- ------------- -------------
Cash flows used in
investing
activities (76,918,095) (36,921,444) (92,230,096)
------------- ------------- -------------
Net increase (decrease)
in cash and cash
equivalents 13,601,210 (10,268,933) (57,053,178)
Cash and cash
equivalents at
beginning of year 20,978,078 31,247,011 88,300,189
------------- ------------- -------------
Cash and cash
equivalents at
end of year $ 34,579,288 $ 20,978,078 $ 31,247,011
============= ============= =============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
24
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS--RECONCILIATION OF NET
EARNINGS TO CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
FOR FISCAL YEARS ENDED: FEBRUARY 5, 1994, FEBRUARY 6, 1993
AND FEBRUARY 1, 1992
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1993 1992 1991
------------- ------------- -------------
<S> <C> <C> <C>
Net earnings $ 13,236,456 $ 22,614,861 $ 27,134,744
Adjustments for items
not requiring cash:
Depreciation and
amortization 33,460,714 28,759,033 26,519,668
Deferred income taxes (3,663,872) (2,193,923) (2,228,159)
Deferred compensation (647,188) (908,539) (2,354,090)
Other (2,968,739) (2,103,615) (1,155,238)
Decrease (increase)
in current assets:
Receivables and
inventories (9,540,628) (1,161,292) (9,078,219)
Deferred costs
applicable to
unsold portraits 950,594 761,130 20,726
Prepaid expenses and
other current
assets (648,701) 568,911 (1,341,188)
Increase (decrease) in
current liabilities:
Accounts payable,
accrued expenses
and other
liabilities 9,225,394 (9,143,019) 17,404,811
Income taxes (14,821) (326,750) (1,021,152)
------------- ------------- -------------
Cash flows provided by
operating activities $ 39,389,209 $ 36,866,797 $ 53,901,903
============= ============= =============
Supplemental cash flow
information:
Interest paid $ 302,486 $ 166,044 $ 195,114
============= ============= =============
Income taxes paid $ 9,828,416 $ 14,934,061 $ 19,628,031
============= ============= =============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements of CPI Corp. (the Company)
include the accounts of CPI Corp. and all of its majority or wholly
owned subsidiaries, partnerships and joint ventures. All
significant intercompany transactions have been eliminated.
Fiscal Year
The Company's fiscal year ends on the first Saturday in February.
The Company designates its fiscal year by the calendar year in
which the fiscal year begins. Accordingly, fiscal year 1993 ended
February 5, 1994, fiscal year 1992 ended February 6, 1993 and
fiscal year 1991 ended February 1, 1992. The 1993 and 1991 fiscal
years are comprised of 52 weeks, while the 1992 fiscal year is
comprised of 53 weeks.
Translation of Foreign Currency
Assets and liabilities of foreign operations are translated into
U.S. dollars at the exchange rate in effect on the balance sheet
date, while equity accounts are translated at historical rates.
Income and expense accounts are translated at the average rates in
effect during each fiscal period.
Cash, Cash Equivalents and Short-Term Investments
For purpose of reporting cash flows, cash and cash equivalents
include cash on hand and short-term investments. Short-term
investments consist of treasury bills, bankers acceptances,
commercial paper, term deposits, government agency notes,
repurchase agreements and government money market funds which
have maturities of less than three months and which are stated at
cost, adjusted for discount accretion and premium amortization. The
government money market funds include obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities, as well as repurchase agreements fully
collateralized by such obligations, which may have a long-term
maturity greater than three months but a short-term option to
liquidate the investment. Based on the short-term nature of the
Company's investments, the carrying value approximated estimated
fair value at February 5, 1994.
Total interest income for years 1993, 1992 and 1991 was $1,210,193,
$1,182,630 and $3,575,897, respectively.
Inventories
Inventories are stated at the lower of cost or market, with cost of
the majority of inventories being determined by the first-in,
first-out (FIFO) method and the remainder by the last-in, first-out
(LIFO) method.
26
<PAGE>
Photographic Sales
Processed portraits initially ordered by the customer are
recognized as sales when shipped from the processing lab to the
studio for customer pickup. Processed portraits not initially
ordered by the customer are recognized as sales at the time the
portraits are purchased by the customer.
Deferred Costs Applicable to Unsold Portraits
Deferred costs applicable to unsold portraits consist of
photographic salaries and employment costs, advertising and other
costs directly associated with the photography function. Such costs
are charged to selling, general and administrative expense when the
customer accepts or declines the portraits.
Depreciation
Depreciation is computed principally using the straight-line method
over estimated service lives of the respective assets.
Retirement Plan
The Company has a noncontributory defined benefit retirement plan
covering substantially all full-time employees. Pension expense,
which is funded as accrued, includes current costs and amortization
of prior service costs over a period of ten years.
Intangible Assets
Intangible assets acquired through acquisitions were accounted for
by the purchase method of accounting and include the excess of cost
over fair value of net assets acquired, favorable lease rights and
covenants not to compete. The excess of cost over fair value of net
assets acquired and favorable lease rights are being amortized on
a straight-line basis over periods ranging from five to forty
years. The covenants not to compete are being amortized on a
straight-line basis over the respective periods of the agreements,
which range from three to five years. Accumulated amortization of
intangible assets was $10,060,786 and $6,408,061 at February 5,
1994 and February 6, 1993, respectively.
Income Taxes
Deferred income taxes are recognized to reflect the effect of
timing differences in the recognition of income and expense items
for income tax and financial reporting purposes.
Investment tax credits are recognized by the flow through method,
which recognizes the benefits of such credits in the year realized.
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting For Income Taxes," in 1993 on a
prospective basis. Statement No. 109 requires the Company to
account for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax
consequences attributable to the differences between the financial
27
<PAGE>
reporting basis and the tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such
amounts are realized or settled. The effect of a change in tax
rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date. The Company
recognized the cumulative effect as of February 7, 1993 of $2.12
million in net earnings as a cumulative change in accounting
principle.
United States income taxes have not been provided on $14,202,535 of
undistributed earnings of the Canadian subsidiary because of the
Company's intention to reinvest these earnings. The determination
of unrecognized deferred U.S. tax liability for the undistributed
earnings of international subsidiaries is not practicable. However,
it is estimated that foreign withholding taxes of $1,420,254 may be
payable if such earnings were distributed.
Earnings Per Common Share and Other Share Information
Earnings per common share are computed by dividing net earnings by
the sum total of the weighted average number of shares of common
stock outstanding plus contingently issuable shares under the
employee stock plans. Fully diluted earnings per common share are
not presented as the differences between primary and fully diluted
earnings per common share are not material.
Reclassification
Certain 1992 and 1991 accounts have been reclassified to conform
with the presentation in 1993.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments", requires the Company to disclose estimated fair
values for its financial instruments. A financial instrument is
defined as cash or a contract that both imposes on one entity a
contractual obligation to deliver cash or another financial
instrument to a second entity and conveys to that second entity a
contractual right to receive cash or another financial instrument
from the first entity. Fair value estimates, methods and
assumptions are set forth for the Company's financial instruments,
short-term investments and long-term obligations in Notes 1 and 7,
respectively.
28
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-05-1994
<PERIOD-END> FEB-05-1994
<CASH> 4,304
<SECURITIES> 62,052
<RECEIVABLES> 21,976
<ALLOWANCES> 918
<INVENTORY> 28,530
<CURRENT-ASSETS> 127,771
<PP&E> 247,440
<DEPRECIATION> 133,111
<TOTAL-ASSETS> 305,796
<CURRENT-LIABILITIES> 65,187
<BONDS> 0
<COMMON> 6,792
0
0
<OTHER-SE> 168,717
<TOTAL-LIABILITY-AND-EQUITY> 305,796
<SALES> 475,520
<TOTAL-REVENUES> 475,520
<CGS> 135,795
<TOTAL-COSTS> 456,735
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,999
<INCOME-PRETAX> 18,520
<INCOME-TAX> 7,404
<INCOME-CONTINUING> 11,116
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,120
<NET-INCOME> 13,236
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
</TABLE>
